Health care and education aren’t exactly the darling issues of conservatism. Taxes, defense, and crime are probably the “Big Three”. This isn’t to say that conservative policy wonks aren’t doing great work on education and health care, but that aspiring young conservatives are much more likely to immerse themselves in the nuances of defense spending than Medicare Part A.
Arnold Kling and Nich Schulz argue persuasively in the current issue of National Affairs that this has to change, and that conservatives need to immerse themselves in the details of health care and education spending if they want to have any hope of controlling the future growth of government.
They start with a simple observation: if you want to know what the “commanding heights” of the U.S. economy are today, take a look at what consumers are actually spending their money on. By this measure, education and health care are “our foremost growth sectors – the ones most central to employment and consumption”. They are also the two sectors that are most subject to government intervention and planning – both on the demand side (through enormous tax expenditures that encourage consumption) and supply side (through extensive state and federal regulation).
We’ve known for a long time that the U.S. has shifted from a manufacturing economy to a service sector economy. What isn’t as well recognized is how much of this shift is dominated by health care and education. Kling and Schulz cite research showing that health care alone was responsible for nearly 1 out of every 4 new jobs during the last two decades. Government was second, with 15% of new jobs, with nearly three quarters of this represention education.
Over the last 10 years, government, education, and health care spending increased by 16%, with employment outside these sectors decreasing. Michael Mandel, an economist at the Progressive Policy Institute, writes that “health and education (public and private) account for an amazing 75% of real wage and salary gains” over that period.
This isn’t necessarily a bad thing, in and of itself. There isn’t anything wrong with consumers deciding that trading more income for better health, or investing in additional years of education.
The problem is that it is extraordinarily difficult to mesure productivity in health care and education, and both sectors have been highly resistant to technology driven efficiency gains that have transformed almost every other sector of the econmoy.
In a podcast interview with Arnold Kling recently, he put it this way: the U.S. manufacturing sector is almost unrecognizable compared to what it was a century ago. But if a teacher from 1900 walked into a modern classroom today, if would seem extraordinarily familiar and very little has changed. This is because education and health care involve more individual judgment and decision making that “are not as easily handed over to machines or outsourced to low-skilled workers abroad.”
Government exacerbates this fundmental problem by increasing demand for services through subsidies and through regulations that shielf workers in these sectors from competition. How inefficient are they? Studies from RAND and Dartmouth suggest that much of U.S. medical spending does not result in improved patient health. The same goes for education: despite spending 40% more per student than other OECD countries, U.S. students rank far below the average in reading, science and math skills.
In short, government policy both encourages spending in less efficient industries, and shields providers in those industry from competition through licensing requirements (for teachers and health care providers) that reduce competition from lower-cost or higher quality providers (charter schools, retail clinics, etc.).
Kling and Schulz go beyond the basic observation that entitlement spending is on course to wreck the U.S. budget. More importantly, government control of these sectors creates massive inefficiencies that shift spending from potentially more productive sectors of the economy into health care and education. And the stakeholders – hospitals, nursing homes, teachers’ unions – in these sectors are critically dependent on additional government spending are powerfully motivated to defend their position on the “commanding heights” and fight off market-oriented reforms.
What to do about it? Kling and Schulz don’t spend much time talking about reforms, other than to advocate for more market-based options and paring back licensing requirements that would encourage “on job learning” in lieu of expensive diplomas. They also note that conservatives have been late to realize importance of health care and entitlement spending. Whether they are too late is another question.